The Czech – A brief history of a

Mojmír Hampl Vice-Governor Czech National Bank

Liberec Economic Forum – LEF 2015 16 September 2015

Technical Univerzity of Liberec Faculty of Economics The crown has a long history in the Czech lands

• has kept currency name from Austro-Hungarian era; crown was introduced by Emperor Franz Joseph I in 1892 to replace old florin • Czech Republic is only successor state to maintain currency name unchanged to this day and Czech crown never suffered from high inflation 2 Territory where the “crown” was once legal tender…

3 …but while Alois Rašín was in office in Czechoslovakia after 1918...

Pursued strict deflationary policy Austro-Hungarian crown was still in circulation in successor countries in autumn 1918 and winter 1919 On 25 February 1919, National Assembly approved Rašín’s secret plan to stamp banknotes Between 26 February and 9 March 1919, national borders were sealed and notes circulating in Czechoslovakia were stamped Only stamped notes were recognised as legal tender 4 …and the price level went down…

Price level in Czechoslovakia, 7/1921–6/1924 30

July 1921 set 20 as 0 10

0 Prices dropped

-10 by 26% in three years -20

-30

Source: Statistical Yearbook 1925

5 …other countries printed money like there was no tomorrow

Prices rose by Price level in , Hungary and Poland, 7/1921–6/1924 850% in 1000 Poland… 900 RakouskoAustria HungaryMaďarsko PolskoPoland 800 700 …and by just July 1921 600 620% and again set as 0 500 500% in 400 Hungary and 300 Austria 200

100

0

Source: Sargent, T. J (1982): “The Ends of Four Big Inflations”, in Hall, R. E. ed. “Inflation: Causes and Effects”, University of Chicago Press.

6 This caused the other “crowns” to weaken sharply

Exchange rate of Czechoslovak, Hungarian and Austrian crown against Swiss franc, 1918–1924

Czechoslovak crown remained Down means stable… weakening of currency

…while Hungarian and Austrian ones weakened by around 370%

Source: Dornbusch, R. (1994): “Post-communist Monetary Problems: Lessons from the End of the 7 Austro-Hungarian Empire”, An International Center for Economic Growth Publication. The present debate? Nothing new under the sun

• Very similar debate took place in our country 80 years ago • Vilém Pospíšil (advocate of gold coverage, i.e. fall in prices, in Alois Rašín’s footsteps) versus Karel Engliš (advocate of price stability, closer to modern view) Rašín Pospíšil Engliš

• February 1934: Pospíšil resigns as CB governor and is replaced by Engliš, who is intent on devaluing the crown by one-sixth. Thanks to this, the almost-five-year period of recession and deflation in Czechoslovakia comes to an end the same year.

8 1953 Currency Reform

Greatest blow to crown came in “Our currency is strong and monetary reform will not take place. Class enemies June 1953 are merely spreading rumours about it.“ Antonín Zápotocký, 29 May 1953 Nevertheless, even “bankrupt” Communist regime preferred direct repayment of public and hidden debt by population to erasure of debt by inflation

9 Post 1989...

As far as possible (relative prices had to be adjusted) we again followed – and are following – the least inflationary path …and by 450% in Poland 5.00 Price level, 1989–2009 4.50 4.00 In 20 years, prices 3.50 went up by 150% 1989 set as 0 3.00 in Czech 2.50 Republic… 2.00 1.50 1.00 0.50 0.00

CZČesko SKSlovensko MaHUď arsko PolskoPL Source: Hiranya, K. N and Tochkov, K. (2011): “Relative Inflation Dynamics in the EU Accession Countries of Central 10 and Eastern Europe”, available at SSRN: http://ssrn.com/abstract=1750356 or http://dx.doi.org/10.2139/ssrn.1750356 …inflation remains under control

11 Thank you for your attention

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